Miners hoard record amount of cash

BHP Billiton’s $US130 per share bid for a Canadian potash company could open the way for a string of other sizable deals in the resources sector as local miners are sitting on a record amount of cash.

Data compiled by The Australian Financial Review shows that listed mining companies have tucked away $23.6 billion in cash and cash equivalent – a 77 per cent increase from a year ago. The cash hoarding is an understandable reaction to the credit crisis, as many have moved quickly to strengthen their balance sheet through capital raisings to pay down debt.

Now that the dust from the financial turmoil has about settled, many are well placed to embark on a merger and acquisition spree.

“I am a great believer that we are going to have a year of M&A transactions across mining," said the chief investment officer for ATOM Funds Management, David Shearwood.

“I think the M&A activity is going to be driven by a growing number of mid-tier mining companies coming either into production now or heading towards production."

Such companies with large ore bodies and low cost of production will make enticing targets to larger predators – particularly if they have overseas assets, as the proposed resources rent tax is tarnishing the attractiveness of the local sector, according to Mr Shearwood.

From that perspective, he pointed to Saudi Arabian copper and gold miner
Citadel Resource Group
and African uranium hopeful
Extract Resources
as potential targets.

Citadel’s key project in the low-taxing country is scheduled to start up in 2011-12 and can be expanded further.

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Extract has made a large uranium discovery in Namibia, one of Africa’s most stable nations, and is just 15 kilometres from Rio Tinto’s Rossing uranium mine.

“
Linc Energy
is also an outstanding takeover target but the problem with Linc is that [managing director] Peter Bond has about a 45 per cent share holding," said Mr Shearwood.

“Linc has enormous coal resources and has 70 billion tonnes of coal, mainly in the US and Australia."

The resources specialist for Argonaut, Troy Irvin, would not be surprised if there is a wave of M&A activity in the sector as he sees deep value among mining stocks – particularly the junior miners.

One potential target that stands out is Western Australian copper and zinc miner
Jabiru Metals
, which is trading about 35¢ versus his valuation of 56¢ a share.

The miner’s Bentley discovery is a “game changer" for Jabiru as the quality of the ore surprised on the upside. Mr Irvin also thinks that the consolidation in the gold sector is likely to continue following
Avoca Resources
’ takeover of
Dioro Exploration
and
Newcrest Mining
’s proposed bid for
Lihir Gold
.

Avoca is likely to continue to look for further M&A opportunities and Troy Resources could find itself a target as it is on track for first production at its Argentinian mine in the September quarter and is trading at a 28 per cent discount to Argonaut’s price target of $3.75 a share.

On the other side of the fence, it is the cashed-up mid-tier miners with cash in excess of their own capital expenditure and debt that are likely to be the most acquisitive.

The most cashed-up players on this basis are copper miner
OZ Minerals
with about $900 million in net cash, rare earth miner
Lynas Corporation
with more than $380 million to play with, and nickel producer
Minara Resources
, which has more than $200 million in its pocket.

“I think the best examples of cashed-up [and acquisitive] companies are in the nickel sector," said Mr Irvin.

“Some of them might use that cash to diversify into other commodities because nickel is the most volatile of the commonly traded London Metal Exchange metals."

It would make sense for nickel miners to buy other metal producers such as copper to help stabilise their income streams.

Cashed-up miners could also become enticing targets themselves – and it won’t necessarily be solely based on the quality of their assets.

While many in this sector may be resting on a mountain of cash, money is still expensive to raise. In some instances, it could be cheaper for a miner that is trading at a premium to its peers to buy a cash-rich rival to access its bank account than it would be to turn to banks or investors for extra capital.